The Court holds that the rules governing an arbitration proceeding should be derived from the text of the contract and the intent of the parties. It further held that ambiguous contracts should be interpreted against the drafter, but that ambiguities in the scope of arbitrable issues should be decided in favor of arbitration.

Comments Off on The Court holds that the rules governing an arbitration proceeding should be derived from the text of the contract and the intent of the parties. It further held that ambiguous contracts should be interpreted against the drafter, but that ambiguities in the scope of arbitrable issues should be decided in favor of arbitration.

Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52 (1995)
 

Relevant Facts: A married couple sued their investment firm in federal court, alleging that their securities trading account had been mishandled by the firm’s brokers. The customer agreement contained both an arbitration clause and a choice-of-law provision. The choice-of-law provision required proceedings in New York, according to New York law, which would have protected certain substantive rights in arbitration. The arbitration clause provided for the arbitration to be conducted pursuant to the rules of the National Association of Securities Dealers (NASD). After being compelled into arbitration, the couple was awarded both compensatory and punitive damages. Under New York law, the arbitrator would not have been empowered to award punitive damages. The brokerage firm moved to vacate the award of punitive damages under the theory that the New York choice of law provision should govern. The district court granted the motion, and the court of appeals affirmed.

 

Question Before The Court: Whether a dispute should be resolved using the rules provided by a choice-of-law provision in a contract when that same contract also includes an arbitration clause specifying that alternative rules govern the agreement.

 

The Opinion: The Court held that where there is a conflict between a choice-of-law provision and an arbitration agreement in a contract regarding the particular rules to govern arbitration, courts must look to the intent of the parties and the text of the agreement. Where there are ambiguities as to the scope of an arbitration clause, they should be resolved in favor of arbitration. The Court called on two standard rules of contract interpretation. First, ambiguous language should be read against the drafter. Second, a document should be read to give effect to all its provisions and to render them consistent with each other.

 

With this opinion, the Court built on prior rulings that limited the ability of states to reign in the application of forced arbitration within their jurisdictions. The Court doubled down on the idea that arbitration contracts are to be enforced according to their terms, and any ambiguity is to be decided in favor of arbitration. In its 2019 decision, Lamps Plus Inc. v. Varela, the Court revisited its decision here and determined that reading an ambiguous contract against the drafter violates the FAA if doing so would render an arbitration clause unenforceable.

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